Taking Control of Personal Finances and Investment Portfolio

10 Jul 2015

Two years out of university, and my money is rotting in the bank through
inflation. Money that could instead be be put to long-term investment to grow.
At the beginning of the year, I was merely maxing my traditional 401K. That
was easy since I simply had to plug in a percentage of my income through
Fidelity. Though I could have stood to diversify
and put in more. With /r/personalfinance
as a jumping off point, my finances and portfolio have come a long way. Here’s
how.

Let’s start off with finances.

Banking

For my checking account, I just use Chase. Simply some
money for expenses and some emergency funds. Although it is generally
recommended to have three to six months of emergency funds, I am a bit more
liberal since I’m well set up against emergencies.

The juicy part is for the savings account. I started using
Ally because they offer a whopping 0.99% annual
percentage yield (APY) on their savings accounts. For comparison, Chase gives a
mere 0.05% APY on theirs. If you have $10K in your savings, that’s a $100
annual yield versus a $5 annual yield. It gets even stronger with compounding.

Discover is a great option as well. They offer
0.95% APY. My SO has a Discover savings account, then we can can take
advantage of each of the banks’ unique revolving credit card rewards. Onto
credit.

Credit Cards

I recently signed up for the Citi Double
Cash, which has become my general purpose
credit card. It offers 2% cashback on all purchases. Amazing, though
you’ll want a couple of other credit cards to back it up.

The Chase Freedom card is decent with
its 1% cashback on all purchases. You may be wondering why I’d need this
since 1 is less than 2. Every quarter, the Chase Freedom presents 5% cashback
select categories (e.g., gas stations, restaurants, theme parks). So I can
take advantage of purchases that fall into those revolving categories, and fall
back to the Citi Double Cash for every other purchase.

The Discover card is the same as the Chase Freedom,
although it also offers 5% cashback on quarterly select categories. So I can
use this card if a purchases is within the layout:, else use the Chase Freedom
if a purchases is within its categories, else use the Citi Double Cash. It also
has some permanent 5% cashback categories such as Century Cinema theaters and
Six Flags, which is nice.

Investment Portfolio

And onto investment. You’ll want to do this when you have enough money for
expenses and an emergency fund. Note that even if you have student loans,
you should think about investing since long-term gains from investment outpace
student loan interests.

There are two good online options for managing investments,
Vanguard and Fidelity. I like
Vanguard because their fund management fees are substantially cheaper. Though
I use Fidelity to manage my 401K since it’s attached to my employer.

Traditional 401K

A traditional 401K is a retirement account where contributions grow tax-free,
and tax is applied upon withdrawals. The annual contribution limit is around
$17,500.

First things first, if your employer does any sort of contribution
matching on 401K, contribute up to the match. It’s free money. Mine does, so I
contribute up to the match.

Roth IRA

A Roth IRA is like the opposite of a 401K, contributions are taxed, but
withdrawals are tax-free. This is good if you expect your future tax bracket to
be higher than your current one. For most people, the annual contribution limit
is $5,500. Vanguard is a good place to set up a Roth IRA.

Once you put enough into your 401K get any contribution matching, you’ll
really want to put as much as you can into your Roth IRA. Everyone should
wish they started theirs as early as possible. Unlike a 401K, you can withdraw
your contributions at any time, even before you retire! However, the earnings
must stay until retirement. They also offer some breaks on withdrawals for
house down payments and such.

If you have maxed out your Roth IRA, then you can go ahead and dump some more
into the traditional 401K.

Index Funds

If you still got some liquidity lying around, you can think about investing
in index funds. Index funds are managed by investors that put your money to
an extremely diversified set of stocks and bonds such that the fund will
generally fall and grow with the entire market. One stock crashing will have
virtually no effect on the entire fund.

With the money remaining in my bank, I found a good basic portfolio consisting
of three funds from the /r/personalfinance
Wiki. The most common recommendation is:

First, you want to figure how much to allocate to stocks and how much to bonds.
The recommendation was to subtract your age from 100, and that’s the percentage
to put into stocks, and the rest into bonds. For instance, my age is 24, so
I’d put about 75% into stocks and 25% into bonds. Stocks are more risky, but
the lower the age, the more time in market for long-term growth. Bonds are more
stable, but don’t offer as much upside, so you want to rebalance to bonds as
you grow older.

Second, out of the allocated stock market percentage, put 80% into the US
market, and the rest into the international market. For my age, I get a total
allocation of:

64%: Total US Stock Market Index Fund

20%: Total Bond Market Index Fund

16%: Total International Market Index Fund

On Vanguard, if you contribute up to a certain minimum, you can qualify for the
Admiral version of the shares, which has a much lower management cost to you.

Recap

Luckily, I ordered my shares recently while the international market shares are
low, and after the whole NASDAQ outage. Can’t wait to have my money working for
me. In conclusion:

Have an emergency fund to last at least three to six months.

Use Ally for savings accounts.

Use Citi Double Cash as a main credit card, with Chase Freedom and Discover
as backups for rewards.

Contribute to traditional 401K up to the employer match, if any.

Contribute to a Roth IRA as much as possible up to the max.

Contribute a bit more to a traditional 401K if money remaining.

Invest in index funds on Vanguard with a stronger focus on stocks the
younger you are, weighted towards the total US stock market.

Any remaining money? Play poker, like me!

Because unused money in the bank rots away at 3% inflation, when they could be
growing and compounding by 10% in a portfolio.